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Rethinking Cable

Good Morning, Friends. The Pound has taken a bit of a tumble this morning, with Cable (GBP/USD) losing roughly half a percent, a large move in these placid times. There was a flurry of employment data this morning; while most of the figures came in close to the market’s consensus expectations, wage growth was weak, and the Bank of England, while still expected to begin raising rates, is now widely believedÂ to be on hold until early 2015. Institutions tend to buy currencies when they expect the associated interest rates to rise, and with the upside momentum in GBP/USD weakening of late, today’sÂ news has apparently moved some discouraged longs to throw in the towel.

The chart directly above is the daily version, my normal point of reference when assessing a currency’s technical position. In the case of GBP/USD, the move lower has covered almost five big figures, from 1.7190 to 1.6698. That’s 2.9% in a month, not bad considering the leverage available in currency trading. There doesn’t appear to be any compelling reason to reverse short positions, although maintaining a trailing stop to capture profits before they erode is almost always a prudent approach. My sense is that with institutions still likely overweight GBP, a fairly aggressive approach to fresh shorts is warranted. Anything above the 38.2% retracement level, say 1.6890, looks like a reasonable short entry.

As always, it’s important to have a stop in mind, since trends have been known to halt, and reverse. In this case, the 61.8% retracement level, currently at 1.7000, looks like a decent reference point for a stop on long positions. That’s a fair distance from 1.6890. My own approach, for what it’s worth, would be to put a partial position on at the 1.6890 level, looking to add around 1.6945, the 50% retracement level. That would create a position with an average price around 1.6915, making something just above 1.70 a more acceptable stop level, roughly 0.5% from the combined entry.

If, given leverage, half a percent is still too much to risk, the position can be smaller, or once the position is established, an hourly chart can be used to set profit targets and stop levels. The key is to limit losses, and to remain in the game. It’s important to remember that even with a perfect setup, once a position is entered, the probability that the next move will be in a favorable direction is 0.5. We just don’t know what the future holds. Consequently managing risk, including moving trailing stops as appropriate, as Todd Mitchell teaches in his courses, is always a close step behind picking solid entry levels based on clear setups.

As this morning demonstrates, “new news”, otherwise known as a surprise, can make a difference, and the largest currency players, when nervous about the outlook for a position, typically don’t spend a lot of time examining charts before pulling the trigger. As I always reminded my junior associates when I was a desk manager, even the most predatory hedge funds tend to be very polite when entering and building a position. When they’re watching profits evaporate or losses mount, on the other hand, they want out right now, and if their own mothers get in the way the nice ladies are going to get run over. That goes double, at least, for the rest of us, so quick reflexes and a willingnessÂ to get out of danger’s way are very helpful. The last one to take profits frequently won’t have any remaining.